Date: 20011203
Docket: 2001-70-IT-I
BETWEEN:
SPIROS VERGOS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Sarchuk J.T.C.C.
[1]
This is an appeal from an assessment of the Appellant for the
1997 taxation year by virtue of which the Minister of National
Revenue (Minister) disallowed business expenses of $46,170.83
claimed by the Appellant. In so assessing the Appellant, the
Minister made the following assumptions of fact:
(a)
during the 1997 taxation year, the Appellant was a self-employed
insurance agent earning commissions income;
(b)
the Expenses were not incurred or if incurred, were not made for
the purpose of gaining or producing income from a business and
were in fact personal or living expenses of the Appellant.
Background
[2]
In 1989, the Appellant was licensed as a life insurance agent and
two years later became an insurance broker. In the years
following, he acted as an associate broker and earned commission
income based on sales of all types of insurance. At some point of
time in the mid-1990s, his health began to deteriorate and for a
period he had been unemployed. The Appellant maintains that the
assessment is wrong and that the necessary documentary material
to support his case has been available for examination by the
Minister's officers for some time. For his part, the Minister
pleads that several letters were mailed to the Appellant by Audit
and Appeals requesting substantiation with respect to the
business expenses claimed but no documentation was provided.
This, counsel for the Respondent noted, was the reason why all
expenses claimed had been disallowed.
[3]
The appeal was initially scheduled to be heard on July 31, 2001.
Prior to the commencement of the trial, counsel for the
Respondent advised the Court that the Revenue Canada auditor had
not been given an opportunity to review the Appellant's
documentation. Counsel further advised the Court that she had
spoken to the Appellant and offered to have the auditor review
the documentation prior to the commencement of the hearing, but
the Appellant was unwilling to do so. After hearing the
Appellant's representations, Miller J. directed that the
documents be provided for examination by the Respondent's
auditors and adjourned the trial sine die.
[4]
At the commencement of the trial on November 6, 2001, the
Appellant testified, produced and made reference to certain
documentary material, and was cross-examined. In the course of
cross-examination, the following documents were produced by the
Appellant and filed as exhibits: (a) the Statement of Business
Activities (expenses) appended to his return; (b) Appellant's
"work sheet" with respect to certain of the expenses;
(c) two car repair invoices; and (d) an invoice re: computer
equipment.[1] The
Appellant also had several hundred receipts which he said
supported various expense items claimed and, as I understood him,
were reflected in his "work sheet".
[5]
Christina DeBenedetti (the auditor) testified for the Respondent.
It immediately became apparent that she had not been given
sufficient access to the Appellant's documents and in
particular, to the receipts, to perform a reasonable review. It
was made clear to both parties that the Court did not intend to
do an audit of the receipts and it was agreed that all of the
Appellant's documents would be filed as exhibits and the
hearing be adjourned to permit the auditor to examine them while
in the custody of the Court Registrar.[2]
[6]
Upon reconvening on November 8, 2001, the auditor, DeBenedetti,
filed a document captioned 'Summary of Changes' prepared
on the basis of the documentary material made available by the
Appellant and was cross-examined by him.[3] At the conclusion of this process,
the Minister's position, based upon the auditor's review,
was that expenses totalling $9,188 were allowable. The Appellant,
for his part, maintains that with the exception of one item in
the amount of $125, all of the expenses he claimed were
legitimate, established, and deductible.
Analysis
[7] I
have now had the opportunity to examine the receipts and
documents produced by the Appellant and have reviewed the
Respondent's analysis of the expenses as provided by the
auditor. I have also considered the Appellant's testimony and
have taken into account his particular circumstances. On balance,
I have concluded as follows:
(a)
The following expenses claimed by the Appellant: (i) advertising
- $217.65; (ii) bad debts - $136; (iii) business tax, fees,
licenses, dues, memberships and subscriptions - $656; and (iv)
management and administration fees - $2,213.50 are to be allowed
in the full.
(b)
Meals and entertainment: Under this head, the
Appellant claimed $5,236.17. He tendered in evidence some 110
receipts ranging in amounts from $1.58 to $541.[4] The Appellant could not or would
not provide any details regarding the business purpose underlying
any of the expenditures. Not one of the receipts bore any
reference to assist him in identifying a client or a business
purpose. As well a substantial number of the receipts examined
indicated that only one person was served. Indeed, he even
maintained that some 25 receipts for amounts less than $10.00
(and incurred mostly at Burger King or Wendy's) were
deductible. On the evidence the position advanced by the
Appellant with respect to the deductibility of these expenses is
not tenable.
The Respondent, based upon the auditor's review of the
material, is prepared to allow the amount of $3,698.73, being
approximately 70% of the amount claimed. This, as the auditor
conceded, was an arbitrary conclusion based on an acceptance of
all expenditures exceeding $80. Although admittedly arbitrary, in
the absence of any reasonable alternative from the Appellant, I
am prepared to accept it. This amount of course is subject to the
provisions of section 67.1 of the Income Tax Act which
reads:
67.1(1) For the purposes of this Act,
other than sections 62, 63 and 118.2, an amount paid or payable
in respect of the human consumption of food or beverages or the
enjoyment of entertainment shall be deemed to be 50% of the
lesser of
(a)
the amount actually paid or payable in respect thereof, and
...
Accordingly under this head, the Appellant will be permitted
to deduct $1,849.32.
(c)
Salaries: The Appellant claimed expenses for
"subcontracting" in the amount of $12,700 which
reflected payments to his three daughters in the amounts of
$5,000, $5,000 and $2,700, respectively. Their ages are unknown
but it appears that they were all resident at home. There is also
little useful evidence as to the nature of the work they are
alleged to have performed nor is there any evidence as to how or
when the payments were made.[5] Wages are generally considered to be payments to
a person for services rendered. They need not necessarily be
based upon time but can include payment computed on the basis of
the amount of work done by an employee. In circumstances where an
individual is claiming wages as a deductible expense, it is
incumbent upon him to establish by some reasonably cogent
evidence the basis upon which the wages were paid to the
employees. In my view, this is particularly so when the claimed
wages are being paid to members of the family. The evidence
presented by the Appellant falls far short of what is required to
establish the deductibility of this expense and accordingly, this
portion of his claim is disallowed.
(d)
Supplies:
The Appellant claimed the amount of $3,353.14 under this head.
The evidence indicates that the supply itself reflected the
purchase of a customer list data base program and accessories.
The Minister's position is that computer software which is
not system software is a capital item and is included in Class 12
and the Appellant would be entitled to a 100% write-off subject
to the half-year rule in the year of acquisition. That position
is correct. Accordingly, the Appellant may not deduct the
foregoing amount as an expense but is entitled to include 50% as
an adjustment to the capital cost allowance claimed.
(e)
Motor vehicle expenses (not including CCA): The Appellant
claimed the amount of $7,209.02 under this head calculated as
follows: $2,255.15 in respect of gas, etc., insurance payments of
$2,046.87 and 85% of the lease costs attributable to a van
amounting to $2,907. His testimony regarding these expenses was
to say the least confusing. Initially he said that two cars were
available to him, however, other evidence including his work
sheet and automobile repair documents indicate that three motor
vehicles were available for at least a portion of time in 1997.[6]
The motor vehicle expense calculations submitted by the
Appellant[7]
indicate that costs attributable to the van formed in excess of
one-third of the motor vehicle expenses claimed. I note as well
that his claim for CCA included an amount with respect to this
leased vehicle. However, in the course of his cross-examination
of DeBenedetti and in his testimony, the Appellant insisted that
the "business" vehicle was the Renault and not the
leased van. It may well be that the true facts are that the
Appellant used more than one vehicle for business purposes,
however, the evidence overall leads to the conclusion that the
van was more likely to have been the primary vehicle used. That
conclusion is consistent with the Appellant's work sheet
filed with the Court as Exhibit R-2.
Based on the auditor's analysis, the Respondent is
prepared to allow the Appellant 20% of the lease and insurance
payments. With respect to the gas and parking receipts, the
auditor observed that the amount covered by the vouchers was less
than the amount claimed on the Appellant's working paper.[8] The Respondent
further takes the position that gas purchases in Brampton and
North York are to be disallowed on the basis that driving between
home and the office are considered personal. The Appellant for
his part takes exception to the reduced amount with respect to
gas and parking contending that it failed to take into account
the actual substantial use by him of the vehicle in question.
I have some difficulty with the Respondent's position in
that the location of a gas purchase is not of much assistance in
the determination of whether the vehicle was being used for
business purposes. On the other hand, the Appellant has not
assisted his cause by simply stating "I used my vehicle for
business purposes" with no further supporting evidence.
Automobile expenses may be claimed by an individual such as the
Appellant for use of his automobile while away from home in the
course of carrying on business. Expenses incurred in driving to
and from work are not deductible. If a professional person uses
his own car partly for business and partly for personal
transportation, the proportions of each must be proven and the
expenditures appropriately apportioned. The Appellant by failing
to maintain a car log or other form of record relating to his use
of the vehicle (or vehicles) has failed to do so. Thus, in my
view, the sole remaining question is whether the amounts proposed
on behalf of the Respondent should be accepted. I have, not
without some misgiving, concluded that given the nature of the
Appellant's business, he should be allowed to claim as a
deduction one-third of the lease payments, insurance and
gas and parking. To be more specific, the Appellant will be
entitled to one-third of the lease and insurance payments claimed
and to one-third of the automobile expenses supported by actual
vouchers being one-third of $1,848.84.
(f)
Capital Cost Allowance: The Appellant claimed capital cost
allowance with respect to computer equipment and a fax machine in
the amount of $474.20. The Respondent does not dispute this item.
The Appellant further claimed the amount of $1,966.41 as CCA with
respect to business vehicle. The Appellant's work sheet and
his testimony indicates that this amount was calculated on the
lease costs with respect to the van. Accordingly, the
Respondent's position is that it is not eligible for CCA. In
addition, the Respondent has agreed that the amount of $1,676.57
is to be allowed as capital cost allowance with respect to the
acquisition of a customer list data base program and
accessories.[9]
Thus, the total capital cost allowance which the Appellant may
claim in this taxation year is $2,150.77.
(g)
Maintenance and Repairs: Under this head, the Appellant
claimed the amount of $1,205.20 and produced in support thereof
ten invoices. One invoice was for the repair of a television set,
five were for a vehicle which was not identified, three were for
the Renault and one was for the Pontiac Tempest. In view of my
conclusion that the Appellant was using the leased van, a Dodge
Caravan, as his primary business vehicle and since none of these
expenses relate to that car, the total amount claimed was
properly disallowed.
(h)
Office expenses: The Appellant claimed the amount of
$5,539.48 as home office expenses made up as follows: mortgage
payments - $4,263.79,[10] house insurance - $125.09, property taxes - $708.10
and the amount of $442.50 for repairs, maintenance and sundry
utilities. The Appellant said these expenses reflect his use of
25% of the residence for business purposes. From the scant
evidence provided by the Appellant it would appear that the
residence is a three-bedroom bungalow. According to the
Appellant, the third bedroom was dedicated exclusively to his
business requirements, while the main bedroom was used by him and
his wife and the second by the three daughters.
There are substantial restrictions on the deduction of expenses
in respect of a home office. Specifically, subsection 18(12) of
the Act provides:
18(12) Notwithstanding any other
provision of this Act, in computing an individual's
income from a business for a taxation year,
(a)
no amount shall be deducted in respect of an otherwise deductible
amount for any part (in this subsection referred to as the
"work space") of a self-contained domestic
establishment in which the individual resides, except to the
extent that the work space is either
(i)
the individual's principal place of business, or
(ii)
used exclusively for the purpose of earning income from business
and used on a regular and continuous basis for meeting clients,
customers or patients of the individual in respect of the
business;
...
The evidence before me does not support the Appellant's claim
for home office expenses. It clearly was not his principal place
of business since his primary office was located in North York in
the office of an insurance broker where he was provided with
basic office requirements for which he paid 40% of his
commissions. Thus, the alleged home office was neither the
principal place of business nor is there any evidence that it was
used exclusively for the purpose of earning income from business
and was used on a regular and continuous basis for meeting
clients or customers. The Respondent was prepared to allow $200
for storage of files, etc. Although this appears to be a
gratuitous gesture with little or no statutory foundation, that
amount will be allowed.
(i)
Telephone and utilities: In this
category, the Appellant claimed the amount of $5,138.98 made up
as follows: AT & T - $102.84, Cantel (cell phone(s)) -
$1,818.18 and computer maintenance of $3,217.94. The latter is
not supported by invoices, vouchers or any other documentary
evidence. The auditor's review of the records provided by the
Appellant with respect to the telephone expenses disclosed that
there was no record or listing of the calls made and it was not
possible to determine whether the calls were personal or
business. As well, the documents submitted by the Appellant[11] indicated that
there were two cellular telephones (two separate telephone
numbers). No explanation was forthcoming from the Appellant. In
the absence of any further documentation, the Respondent was
prepared to allow the amount of $161.31 (10% of the Cantel and
AT & T bills submitted). Given the lack of any substantive
evidence supporting the Appellant's position, it is difficult
to reject the Respondent's position. However, there are
several facts which should be taken into account. First, the
Respondent is satisfied that there were two cellular telephones.
That being the case, it is also reasonable to assume that the
Appellant was the primary user of one for both business and
personal communication. Secondly, as the Appellant pointed out,
the 10% urged by the Respondent fails to take into account the
obvious fact that as a salesperson carrying on his own business,
telephone communication was integral to making sales. On the
other hand, I cannot accept the Appellant's position that the
telephone was used almost exclusively for business purposes. On
the basis that there were two cellular telephones, one of which
was primarily used by the Appellant, I am of the view that 25% of
the $613.13 claimed be allowed as a business expense.
With respect to the Appellant's claim of $3,217.94 for
computer maintenance, the failure to substantiate this claim in
any sense of the word leads to the conclusion that this amount
must be disallowed.
[8]
The appeal is allowed and the matter is referred back for
reconsideration and reassessment in accordance with the above
reasons.
Signed at Ottawa, Canada, this 3rd day of December, 2001.
"A.A. Sarchuk"
J.T.C.C.
COURT FILE
NO.:
2001-70(IT)I
STYLE OF
CAUSE:
Spiros Vergos and Her Majesty the Queen
PLACE OF
HEARING:
Toronto, Ontario
DATE OF
HEARING:
November 6, 2001
REASONS FOR JUDGMENT
BY:
The Honourable Judge A.A. Sarchuk
DATE OF
JUDGMENT:
December 3, 2001
APPEARANCES:
For the
Appellant:
The Appellant himself
Agent for the
Respondent:
Param-Preet Singh (Student-at-law)
COUNSEL OF RECORD:
For the
Appellant:
Name:
N/A
Firm:
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2001-70(IT)I
BETWEEN:
SPIROS VERGOS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on November 6, 2001, at Toronto,
Ontario, by
the Honourable Judge A.A. Sarchuk
Appearances
For the
Appellant:
The Appellant himself
Agent for the
Respondent:
Param-Preet Singh (Student-at-law)
JUDGMENT
The
appeal from the assessment of tax made under the Income Tax
Act for the 1997 taxation year is allowed and the assessment
is referred back to the Minister of National Revenue for
reconsideration and reassessment in accordance with the attached
reasons.
Signed at Ottawa, Canada, this 3rd day of December, 2001.
J.T.C.C.
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